Level 6Momentum oscillators: RSI and MACD
RSI: the relative strength index
RSI (Relative Strength Index) compares the strength of recent gains against recent losses and converts it into a value between 0 and 100; the common setting is 14 periods. When gains dominate, RSI rises; when losses dominate, it falls. The traditional thresholds are 70 and 30: above 70 is labelled the overbought zone, below 30 the oversold zone.
Those labels are the most misunderstood part of the indicator. "Overbought" sounds like "it has risen too much, so it must fall" — yet in a strong uptrend RSI can sit above 70 for weeks while price keeps climbing. The same holds for oversold: in a hard decline, RSI can crawl below 30 for a long time.
The correct reading depends on context: in a sideways market, extreme RSI values coincide with the edges of the band and are read alongside the possibility of a reaction; in a trending market, extreme values usually reflect the trend's strength, not its exhaustion. Before looking at RSI, ask the level 2 question first: is this market trending or sideways? The indicator's meaning changes with the answer.
This content is educational information, not personalised investment advice. The chart examples are illustrative.
A short note
"Overbought" is a label saying that what the indicator measures — the recent dominance of gains — is high; it issues no instruction and sets no date. In a strong trend the label can stay lit for weeks, which usually describes the trend's strength, not a fault in the tool. Reading it the other way is the same mistake mirrored: the label makes no promise of continuation either. Reading it in context — trending market or sideways — is station 6's central question.